This is not the first market crash during the bull run of the past four years. In fact, the
carnage was far worse during the meltdown in May 2004 and the collapse last May. On
each occasion, while local factors may have exacerbated the plunge, the fall was global in
extent. That is an indication of how closely correlated markets have become. The first jolt
came in May 2004, when markets plummeted as the UPA government, dependent on
support from the Left, came to power. Apart from this domestic uncertainty, the fall
coincided with a sell-off in the global markets, as the US Fed raised interest rates for the
first time since 2000. At that time, too, the concern was that carry trades would unwind,
thanks to higher borrowing costs in the US, the difference being that these trades were
being funded by cheap dollar borrowing. As a result, there was a sell off in emerging
markets.

The next shake out happened in April 2005, when fears over the US current account
deficit and the impact of rising oil prices led to the fall in global markets. That was a
small correction, but a year later markets plunged again, the ostensible reason being
higher than expected inflation in the US, which would mean that the Fed would continue
to tighten.

This time the impact on India was sharper thanks to the country having become on of the
world’s most expensive markets and local punters taking huge positions in the futures
market. After each crash Mr. Market picked himself up and continued on is upward
journey. Trouble is, global imbalances are growing, US and local growth is becoming
more difficult, yet markets keep going higher.